Determining Your Company's Legal Structure Worksheet Self-Assessment: 1. 2. 3. 4. 5.
Relatively speaking, how simple would I like it to be to set up and operate my business? Are there any other people who will own an equity stake in my company? Will the venture be a "side business" or my main source of income and benefits? What are the tax advantages and disadvantages of the structure I am considering? To what extent am I willing and able to be personally responsible for business debts and liabilities in order to reach my goals? 6. To what extent must I retain control over the management aspects of the business in order to reach my goals? 7. What is my survivorship plan for the business? In other words, what will become of it after my death or longterm disability? 8. How much liquidity do I need? Case Study: Let's take a look at a scenario with four different corporations and their various approaches to tax planning. For this example, we will assume that each company had $100 in net income before taxes. C Corp. (Bottom Tax Bracket)
S Corp.
S Corp. (35%)
C Corp. (15%) w/Tax Planning
Net Income
$100
$100
$100
$100
Corporate Taxes @ 35%/15%
(35)
(15)
0
0
Corporate Purchase of Deductible Benefits Not Taxable to Recipients
0
0
0
(30)
Net Income After Corporate Taxes
65
85
100
70
(26)
(34)
(40)
(28)
Net Dollars to Investor/Shareholder
39
51
60
42*
Total Tax Paid on $100 of Profit
61
49
40
28
Personal Income Tax @ 40% (state & Federal)
(*Plus $30 of taxfree benefits, for a total of $72)
It is interesting to see that with different approaches to tax planning, each of the four corporations ended up with drastically different results. The taxes they paid on $100 of profit ranged from 28% to 61%! And, as a result, the funds distributed to shareholders ranged from $39 to $60. SelfTest: Consider the following questions when evaluating your need for liability limitation. 1. 2. 3. 4.
How likely are large, uninsurable liabilities in your line of business? Do you have liability exposure to personal injury plaintiffs, commercial creditors, or financial or contract risks? Is sufficient liability insurance available at reasonable rates for your likely liabilities? Is the amount of assets to be owned by the business entity and available for creditors worth the cost of protection? 5. Do you have personal assets that would be worth protecting if they became available for creditors? Common investor concerns include: • • • •
Will I be able to sell my investment if I need cash? Will I be able to raise funds through quicker and cheaper private placements, or must I bear the delay and expense of a public offering of stock? Will the owner's death, disability or retirement affect the entity's value? Will I be burdened by SEC and state securities regulation of solicitation of investments in particular types of entities?